ChiNext gets boost thanks to rule relaxation

ChiNext’s IPO rules are being altered to become more flexible, but the dilution may lead to new risks.

ChiNext’s IPO rules are being altered to become more flexible.  That was confirmed by Song Liping, the president and CEO of the Shenzhen Stock Exchange, speaking last week at the forum on promoting the integration of technology and finance.

However, the dilution may open China investors to new risks.

ChiNext is the NASDAQ-style board of the Shenzhen stock exchange that was founded in 2009. It has been a success, as demonstrated by the increase of 80% in the ChiNext index in 2013. 

During May 2014, China’s State Council released the blueprint for capital market development known as ‘The new nine-point opinions’.

One section of that report advocated speeding up ChiNext reforms.

China’s regulator, the China Securities Regulatory Commission (CSRC), has now released revised ChiNext IPO and refinancing rules.

The problem with the previous listing criteria was due to them being written more for traditional industries with emphasis on continuity and the stability of the firm’s track record.

As a result, many enterprises that had been in a critical stage of development tended to fail the regulator’s IPO review and lost financing opportunities due to temporary volatility in performance.

“Last year the market had some heated discussions around new concept technologies including mobile gaming, electric cars, wearable device and big data, said Fisher Xi analyst at Religare Securities. These concepts triggered trading interest in ChiNext and pushed up the index.  I personally don’t believe many of these companies could prove themselves through succeeding earnings delivery, and maintain the market’s high expectations. China has not yet proven that it could retain more margin from products through a focus on technology research and development.”

The revised IPO rules ease the requirement on financial indicators, scrap the requirement for sustained growth and streamline other IPO criteria.

In the next stage of development for ChiNext, Song Liping said that, further investigation will now be made regarding how ChiNext, “reverts to its original purpose of serving technological and growth enterprises that are promising but not yet profitable.”

It has been inferred that high tech companies whose bottom line is still in the red may be admitted in due course. Whilst it will incentivise companies to list, it will come with risks to international and domestic investors, for as western markets have already experienced in the last decade, once listing criteria are relaxed to allow flotations among loss-making new economy start-ups, it brings additional risk as many fail to live up to their initial promise.

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